The Box We Bought

Will the Knoxville Convention Center ever be able to overcome its massive debt, yearly losses, and new competitors to truly succeed?

Charles Maldonado

4:00 PM, May 21, 2008

The Park Concourse, on the west side of the Knoxville Convention Center, is empty. It's so empty that you can hear people typing in nearby offices.

In just an hour, more than 500 people are going to descend on the convention center for the 2008 Tanasi Girl Scouts Women of Achievement Gala, but in the Concourse, sort of a showcase lobby of the building—over 6,000 square feet, with a floor-to-ceiling panoramic view out on to World's Fair Park—you'd never realize it.

The convention center's ability, or inability depending on who you ask, to draw large-scale events has been a sensitive issue for government and residents alike since the 500,000-square-foot building—"the box," as insiders refer to it—opened its doors in August 2002. That makes sense. It cost $160 million in tax money to build, not counting interest, and it won't be paid off until 2032.

And the convention center seems to look this empty pretty often. When you do see people coming and going, their dress—tuxedos, frilly white gowns, puffy sleeves—betrays the fact that they're probably not there for a trade show.

"There's a lot of brides who want to get married on the staircase on the Park Concourse," says convention center manager Mary Stephens-Bogert. "But we really can't book that all the time. It's a public space, and we like to keep our public spaces open for larger events."

Stephens-Bogert's voice echoes off the walls of the vast lobby as she shows off one of its most popular features, a huge staircase connecting the second and third floors of the building. She's been with the convention center since "the beginning," she says, and she's one of its biggest defenders. She's quick on the draw when it comes to rattling off the good news about the center.

In the 2002-2003 fiscal year, the year it opened, KCC management tracked about 299,000 attendees at the convention center events.

"That number has grown steadily every year to over 379,000 in 2006-2007," Stephens-Bogert says. That's been their best year so far. What is it going to be by the end of this year? "This year's numbers are expected to be around 358,000," she says.

So a little less, then? She stops for a second.

"We were operating at about 51 percent [rate of attendance] for the year," she says, her voice a touch more business-like, but still friendly. "That's quite good when you consider that the industry average for convention centers is about 40 percent."

Just recently, the center booked the American Quilters Society American Quilt Expo, a 10,000-attendee event, for a three-year contract, beginning in July 2009. This week, the center's hosting the annual Destination Imagination convention, one of the convention center's only perennial big cons. They expect about 10,000 people for that one, too.

It seems so empty because today, the activity is going on somewhere else. There's an awful lot of somewhere else at the convention center—494,00 square feet of it. So, even when it looks dead, somewhere in there, it's buzzing with activity.

When you start to look at the convention center closely, you realize how complicated it actually is. On the one hand, it is undeniably expensive. It cost nearly $4.5 million a year, just for operations—things like electricity, heat, food supplies (the kitchen goes through 1,500 sticks of butter every month), and staff, and it only made back $3.2 million on events. The difference is paid by the city. Plus, there's the $10 million a year from the city to pay off its debt. By the time it's all paid off in 2032, it will have cost $241 million just to pay for the construction of the project, according to Knoxville Mayor Bill Haslam's most recent budget proposal.

But, on the other hand, it is a job provider. Hundreds of people, including 60 full-time employees, 250 part-timers, and countless contractors, are directly dependent on it for their livelihood. And the Knoxville Tourism and Sports Corporation (KTSC), the company that's responsible for booking it, estimates that it's been responsible for $299 million in economic impact to the city, or about $50 million per year.

So when people ask whether it was worth it for Knoxville to get into the major convention business, and whether the convention center has been a real success, the answer is: Well, it's complicated.

You Play the Hand You're Dealt

You don't get to hear Bill Haslam sigh very often.

"In government, as in business, you can only play the hand you're dealt," he says, letting out a long, slightly pained breath. Just a moment before, Haslam was characteristically upbeat. He was smiling his signature smile—apolitical in its warmth and near-goofiness—and he looked as energetic as ever. When he starts talking about the convention center, though, his demeanor shifts. His shoulders slump a centimeter, and he leans half an inch farther back in his office chair. All of a sudden, Haslam looks just a little bit tired.

After all, the city still owes more than $144 million dollars on the convention center (not counting interest payments), down from $162 million when it was first built. The center itself still operates at a loss, this year—one of its best since it opened—at $1.198 million. Of course, that number was more than $2 million after its first year of operations. But that's not all.

"To put it in historical context, since the convention center was first discussed, things have changed. First of all the convention business itself has changed. There are fewer of the big regional conventions than there were 10 years ago. The other thing is that since it was built, a lot of competitor cities have built similar facilities."

Competing trade show markets like Louisville, Ky., Nashville, and Chattanooga have all expanded their convention centers since the building was finished in 2002. And last September, Sevierville built a brand new 200,000-square-foot events facility that has had one major (2,000 to 25,000 attendees) event per week for all but one week in 2007. Sevierville's City Development and Marketing Director Mike Wilds is projecting 37 major events in 2008. What's more, says Wilds, only one of those events was locally generated.

"We're not trying to get local groups here at all," says Wilds. "We want events that bring in tourists from the resorts; we don't want to compete with local business."

"That's all changed the financial equation," Haslam says.

The Financial Equation

"The overall picture of the market—in particular for large centers—remains problematic," says Heywood Sanders, professor of public administration at the University of Texas at San Antonio. "It's being continually described as a buyer's market."

In 2005, Sanders published the Brookings Institution report Space Available: The Realities of Convention Centers as Economic Development Strategy, which examines convention center attendance, economic impact, and available space.

For his data set, Sanders used the TradeShow Week 200 list, an annual analysis of the 200 largest national conventions put out annually by industry magazine TradeShow Week, studying event attendance from 1991 to 2003. What he found was that even as attendance at the country's largest exhibitions was stagnant overall—peaking at 5.1 million in 1996 and dropping to just over 4 million in the early 2000s, following Sept. 11—available convention space, and public dollars invested in that space, increased dramatically. National convention space went from 40.4 million square feet in 1990 to 60.9 million in 2003, a 51 percent increase. And, during roughly the same period, spending on the facilities doubled, from $1.2 billion in 1993 to a $2.4 billion average between 2001 and 2003.

Sanders says that as these centers continue to lose money, they often try to make up their losses by booking more and more small-scale events.

Convention industry groups have taken note of the trend as well. In August of last year, tourism industry groups Destination Marketing International (DMAI) and the International Association of Assembly Managers released the report Best Case Practices: Convention Center Sales and Convention Center Operations, which noted that "supply of available exhibit space has exceeded demand, resulting in a ‘buyer's market.'" The result, Sanders says, is that convention centers, trying to stay competitive and keep their attendance numbers high, will often employ tactics like booking exorbitant numbers of locally-based shows that undermine the very reasons they were built.

The Knoxville Convention Center's best year, in terms of attendance and minimizing financial loss, was 2006-2007, according to KTSC records. It was the first year that it made more money—$1.8 million, 68 percent of its total income, including food and beverages—from large-scale shows than small parties and banquets. Still, only 27 of the 297 events held there that year were out-of-town events, booked through non-Knoxville planners by KTSC. And attendance at those events came out to only 36,111, with only one out-of-town event—the annual Destination Imagination Finals—drawing more than 10,000 people.

Haslam says it's a situation he wishes were different, but if it can't be, then booking a lot of small shows just amounts to good fiscal practice.

"I see it as a realistic thing. It's a good strategy," he says. "You can either beat your head against the wall, or say, ‘How can we attract some more business for this facility that works?' So I think we picked the second. So, was it designed to host wedding receptions and high school graduations and Bar Mitzvahs? Maybe not. But I think it's become a good use for the facility while we're out there attracting things like the Quilters Convention that will bring a lot of people here."

But large-scale convention centers are built with the idea of attracting tourism, not playing host to Knoxville events paid for with Knoxville dollars.

"Those people are not spending money in the Knoxville area that was not there already," Sanders says. "The question becomes, what was the purpose of the convention center and how was it sold to the public?"

The Pitch

How do you bring tourist money, giving the local economy a shot in the arm, into a non-tourist town like Knoxville? In June 1997, Jim Haslam II, founder of Pilot Corp.—and Bill Haslam's father—and Bill Arant, then-managing partner of financing company Venture Alliance, presented their proposal to private sector development group The Downtown Organization.

"The ‘table's been set for 15 years,' for a new Knoxville Convention Center, and ‘now it's time to sit down to dinner,'" Haslam was quoted in the News Sentinel.

Arant and Haslam cited the results of a study by consulting group Coopers & Lybrand, which predicted that Knoxville could generate $41 million in investment if it built a 100,000-square-foot center with an accompanying hotel.

The study showed a 22 percent convention attendance increase between 1983 and 1996 (the peak year before a steep downturn). It also pointed to $16.8 billion in national convention center revenue.

"At the time—10 years ago—it was certainly a long-sought goal of the business community," says then-Mayor Victor Ashe. "I think people thought that not having a convention center somehow made Knoxville a second-class city. At the time we built it, it was widely supported. I went for re-election in 1999 on the platform of building the convention center, and the other guy [ex-Mayor Randy Tyree] didn't argue with it at all."

It would put the city in the same league as major regional convention markets like Nashville and Atlanta. The Public Building Authority (PBA), with $3.5 million pledged to look into the project, hired Philadelphia-based convention center company Spectacor Management Group (SMG) to consult (in 2000, it would also be selected to manage the Knoxville Convention Center).

But by the beginning of 1998, the idea had grown significantly. On Jan. 12 of that year, the PBA came back with a $127 million proposal for World's Fair Park, and what had been a 100,000-square-foot proposal began to turn into a 500,000-square-foot reality, with a brand new city-owned and -funded public park wrapped around it. One that, according to Ashe, at the time, could generate, not $40 million, but $70 million per year in new, incoming tourist money.

The Debt

They finished the center in 2002: new, shiny, huge, and very, very expensive. The most oft-cited figure when talking about the entire debt accrued from the project is $162 million, more than the city's entire General Fund Budget for 2002-2003, and nearly as much as the $168 million Haslam is requesting for 2008-2009.

"I really wish that wasn't all under ‘Convention Center' in the budget," says Stephens-Bogert. In fact, the box itself cost only about $110 million altogether, says City Finance Director Jim York. The rest of the cost went into the $10.5 million land swap and removal of a KUB substation in World's Fair Park (the city was responsible for $7 million); $5 million to widen the Clinch Avenue viaduct to three lanes; the construction of the Locust Street Parking Garage, which cost $9 million; and $14 million in renovations to World's Fair Park, including landscaping, added pedestrian bridges, and pools; and miscellaneous engineering and insurance costs.

To pay for it, the city did a series of bond issues in 1999 and 2002. There are three pieces of debt left, adding up to more than $144 million—or about 64 percent of Knoxville's $223 million in long-standing debt—as of the June 30 beginning the 2008-2009 fiscal year. Haslam plans to pay off $3.4 million of its principal debt and about $6.7 million in interest next year.

"It's always been about $10 million a year, so I guess we've paid out about $60 million so far," says York. "About $16 million of that has been principal; the rest would be interest." The entire debt won't be paid off until 2032.

Debt service is paid from a number of intergovernmental revenue sources, from events admissions taxes and city and county hotel-motel taxes. This year, debt service should generate $5.15 million from those taxes, as well a yet to be determined amount that's captured from state sales taxes collected in downtown Knoxville. The rest—nearly $4.7 million—will come from the debt service fund. And that comes from local property taxes.

"You could do a lot of things with that money," says Haslam of a hypothetical world without convention center debt. "You could fund more infrastructure-type things like more sidewalks, pave roads more frequently, or you could do more projects. We could try to speed up the Cumberland Avenue project, the redesign there, or the South Waterfront, or the things we're trying to do in the Downtown North area."

Still, those interest rates will, hopefully, start to see a downturn, thanks in large part to the city's good credit score, which was upgraded from AA to AA+ in late March by Standard & Poor's.

"In today's world, credit has been tightened so much because so many people have made bad decisions," says Haslam. "What happens there is that the people in a better financial position tend to be a safer place to go, so they get rewarded more."

Hotel-motel taxes are also contributing a bigger chunk to that $10 million than they were before the convention center opened. County hotel spending grossed almost $5.3 million in taxes during the 2006-2007 fiscal year. The county then passed on about $523,000 to the city. The Knox County hotel tax is 5 percent, which means that tourists spent about $106 million at area hotels that year. Compare that with 2000-2001, when, according to Gloria Ray, the president of the KTSC, the county only saw around $75 million in hotel room stays, less than $3.9 million in taxes. This year seems to have continued the trend, with only a mild drop-off, at $5.1 million projected in county hotel-motel tax revenues, or around $102 million in stays. The county pays Ray and KTSC 45 percent of the hotel-motel tax.

Loss Leaders

But added on to that massive structural debt issue is the fact that the convention center continues to operate at a loss. This year, SMG is projecting a loss of $1.198 million, and it's asking the city for $1.265 million on next year's budget to cover its costs. It's doing better than it used to, of course. In its first few years, the convention center was consistently operating at a $2 million-plus loss.

"It's a peculiar phenomenon of this business," Sanders says. "There are very few convention centers that actually make money, or even effectively break even."

"It was never meant to generate a profit. If it were, it would be run by a for-profit company," Ray says. "It's meant to be an economic driver. And that doesn't just mean that it's a tax generator. It gets people jobs. It doesn't necessarily mean anything about the revenue for the convention center, but it means somebody's able to buy shoes for their kid."

But the city government and tax-payers would like to see it at least keep costs to a minimum. One good way to do that is to book a lot of small, local parties like weddings.

"And local events will pay. If you host weddings or social events or banquets, you will sell food and beverages," says Sanders.

As a matter of fact, using food and beverage sales to offset loss has been a strategy that SMG has used, pretty effectively, in the past few years.

"One of the reasons that we do better here compared to other facilities in our competitive set is we have our own in-house food and beverage," says Stephens-Bogert.

While space rental income is projected to be slightly lower in the 2008-2009 budget—$1.516 million versus $1.535 million—and more than $300,000 lower than the $1.841 million in rentals during the 2006-2007 fiscal year, food and beverage sales have gone up steadily every year since 2005-2006, when food sales grossed $2.6 million.

Next year, it should bring more than $3.7 million for the convention center, netting $2.1 million after service costs.

But those food sales can signal a problem, too, says Sanders.

"Not unlike a casino, the convention center is interested in keeping you inside and feeding you," he says, meaning that attendees are less likely to eat, and spend their money, at downtown restaurants, especially the ones who aren't going to be spending the night.

A lack of overnight stays was a concern in July 2003, when the city decided not to renew its contract with KTSC, just one year after Ray partnered her Sports Corp. promotions group with the city's old Convention and Visitors Bureau.

"The out-of-town bookings are anemic," Ashe told the News Sentinel in August 2003. "The convention center was not booked so we could have a new venue for everybody's wedding and Bar Mitzvah and football pre-game party."

There were only seven out-of-town bookings in that first year, according to KTSC records. But among them were the convention center's ribbon-cutting event, the Annual National Junior Olympics Games, a three-day show with 31,010 attendees; the United States Bowling Congress' Annual Spring Men's National Tournament, a three-day event with more than 94,000 attendees; and the first-ever Destination Imagination convention, which booked the convention center for a contract through 2012. Ray had already signed on 11 groups for 2003-2004 and three for 2005-2006.

"I think there was just some public disappointment," says Ashe. "I think a better team is running it now."

The Formula: Measuring Economic Impact

When you boil it down, Ray's livelihood depends on a math problem, albeit a somewhat abstract one. Her company, KTSC, claims to be responsible for hundreds of millions of dollars in economic impact in Knoxville. And they're getting public money, to the tune of $1 million from the city and $2 million from the county, to do it.

Economic impact, the amount of potential money flowing into a city, is the reason convention centers are built. It's an elusive, tricky thing to measure, but there is a formula for it. Actually, there are a lot of them. Ray uses one based on ExPact, a formula developed by DMAI about 10 years ago to measure what's called "direct spend," the amount of money that you could assume that someone likely spends while he's at a convention.

How it works is this: Say you wanted to measure the amount of money generated by Destination Imagination. KTSC is assuming 10,000 attendees at DI for a three-day event. KTSC came up with $230 as the average amount of money someone would spend per day in Knoxville. So...

10,000 x 3=30,000 attendee days

30,000 x $230=$6.9 million direct spend

Ray takes it one more step, and employs a multiplier of 1.57. This calculates for full economic impact, i.e. how new money is going to circulate in town.

$6.9 million x 1.57 = $10.833 million.

This is, of course, somewhat controversial among a highly-specialized group of obsessives, among them Heywood Sanders.

"That is clearly very flawed," he writes in an e-mail. "By no means do all of the attendees at a three- or four-, or one- or two-, day event stay the entire period."

This formula assumes three hotel nights and nine meals for each of the 10,000 kids attending that event. Many other cities use "average stays" rather than the actual length of conventions to figure impact. Some are perfectly happy without the multiplier, too, just relying on the "direct spend data." But Ray says it's a conservative estimate because it assumes that no one else is coming with the registered attendee, which, especially in a children's-oriented event, is very unlikely.

"I'm just assuming one person's coming," she says. "I'm not counting their mom, their dad, their memaw. They're going to be eating, too, right? Staying in a hotel?" Ray adds that she often shaves a few thousand people off the number the convention planner gives her. "I try to do this as conservatively as I can because I don't want anyone to think that I'm playing with these numbers."

2042?

The Knoxville Convention Center has about a 40-year life span before it's going to require some major structural repairs, says York. That means, in 2042, exactly 10 years after the city pays off the debt, it will be ready to be torn down or very expensively rehabbed. Mayors Haslam and Ashe chime in with some reflection and advice.

"It's easy to ask the ‘Would you do it again?' question," Haslam says. "Now, what I've realized that's really important about being mayor is real estate and structures. Because, well, they're not forever but they're for a long time. Forty years is about how old the Civic Coliseum is. Now, that doesn't pay for itself either. On the other hand, it's been a facility that's added to this town. I think people will get used to the convention center. It'll just be part of daily life. Two or three years ago, it was this albatross, but now people say it's a nice facility."

Ashe realizes that, because he was mayor when it was proposed and built, he'll forever be linked to the convention center in Knoxvillians' minds. But he says he hardly sees it as his legacy to the city.

"Looking at my 16 years as mayor, certainly building the convention center was important, but I would put parks and greenways as more important," Ashe says. "They last for eternity. I don't think anyone would suggest that bricks and mortar will last for eternity. City leaders in 2040, as I don't expect to be living then, will have to make up their own minds as to what to do with it."

The Cage

What's really interesting about the convention center as a building is the parts of it that most people don't get to see. On the third floor of the building is a large, cement-floor corridor. The hallway connects the kitchen and administrative offices to the ballrooms and meeting rooms. That kind of makes it the beating heart of the place, and it's a good example of the energy and personnel it takes to run the place even when the lobbies are bare. The hallway is abuzz, not just with people—service staff running from room to room or taking coffee breaks, administrators and managers calmly preparing for some disaster—but with stuff. To one side, hundreds of chairs are stacked.

"We have about 800 chairs. It's not really sufficient for us, though," says Stephens-Bogert. "We're working on getting another 1,100 right now."

Then there's the prop cage. Right in the middle of the hall, there's a large metal cage, filled with weird, colorful junk: place-setter teddy bears holding a fish that says "Welcome," a hula monkey made of two coconuts, and, of course, lots of orange streamers and footballs. The convention center purchases some of it, and some of it is left by attendees, contributing more items to further pack up in a building that, for Knoxvillians, is already pretty loaded.